Tax planning for 2011 – a primer

OK, so what do I mean when I talk about “tax planning”? Well, that means putting a little bit of purpose into your financial life. You can absolutely (and legally!) affect the amount of tax that you owe with just a bit of forethought. But, like most things, scrambling at the last minute will not work! Most of the strategies that I will present over the next few weeks must be done in 2011 in order to affect your 2011 taxes.

There are many many goodies offered by the IRS in the form of various deductions and credits. But, and this is a big but…many of those goodies start to fade away as your income gets higher. So, one area of tax planning is income deferral, which just means shifting your income from 2011 to 2012. This will make your income in 2011 lower, which may allow you to qualify for some of these goodies.

By the way — these aren’t obscure goodies* either — these are good ones like credits and deductions for tuition, IRA contributions, and the child tax credit.

So, how can you shift income? Well, there are a few methods, and all of them need to be examined from all sides to make sure that it is the best option. One popular option for shifting income is to take capital losses in 2011. This isn’t really shifting income as much as it is reducing your AGI. If you have an unrecognized capital loss, you may want to go ahead and take it in 2011, which will offset any capital gains and $3,000 of ordinary income (if the capital losses exceed the capital gains by at least that amount).

Another possibility would be to defer the receipt of a year end bonus. If receiving the bonus would make you lose a tax credit, then you may just have wiped out all of the gain from the bonus! But, this one you need to be careful with…if the bonus is already due and payable and you just haven’t gotten the check yet, then it is too late. Also, if the deferral extends beyond 2 1/2 months after the close of the tax year, the bonus will be treated as nonqualified deferred compensation. There’s also FICA tax to be careful with.

As you can see, there are a few landmines to watch out for if you are trying to reduce your tax for 2011. Please give our office a call — we’re very experienced with helping our clients paying the lowest possible tax through the most efficient tax plan for their specific situation!

*The most obscure tax deduction I could find was for body oil! A tax court ruled that body oil, which is used to highlight a bodybuilder’s muscles during competition is considered a legitimate business expense, and therefore deductible. If you don’t meet those qualifications, don’t worry, I’m sure we can find some tax deductions that fit your situation!